EMEFIELE RESUMES AS CBN GOVERNOR AMID TOUGH CHALLENGES!

The Central Bank of Nigeria will today (Monday) enter into a new chapter in its history when Mr. Godwin Emefiele officially takes over the mantle of leadership after months of local and international scrutiny on the institution following the (mis)handling of the departure of the flamboyant ex-governor, Mr. Lamido Sanusi.

Sanusi was suspended by President Goodluck Jonathan in February over allegations of financial recklessness in what some commentators believed was politically motivated, because of his allegation that oil revenue meant for the Federation Account was missing.

While Sanusi is still in court challenging his suspension, analysts believed that he left behind a strong legacy of excellent economic management at the CBN.

Many also believe that his successor, Emefiele, will move the CBN to the next level going by his track record as an achiever during his tenure as the former Group Managing Director of Zenith Bank Plc.

But Emefiele will soon face a fierce battle as the CBN governor and how he handles the issues that will come up in the coming months will determine the success or otherwise of his tenure.

Economists say pre-election and election years are usually the toughest for central bank governors all over the world, particularly in developing countries, which Nigeria is one.

This is simply because extra-budgetary spending arising from electioneering expenses will most certainly lead to excess cash in circulation and this will ultimately cause inflation and put pressure on the naira, while myriads of other monetary challenges that will pose threats to the economy will come forth.

While the major economic challenges lie ahead as the elections draw near, experts say there are immediate problems the former Zenith Bank helmsman needs to quickly tackle in order to put the economy on the right track.

An economic analyst and Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane, says although the macroeconomic environment has been relatively stable, there are several risks the new CBN governor will have to contend with in the immediate term.

“The conflicting trends of core and headline inflation since January 2014 will have to be put in perspective as well as the concerns over the eroding fiscal buffers; all of these could accentuate another speculative attack on the naira,” he says.

Rewane, whose firm is into research and business advisory, notes that the markets have been in a “wait and see” mode, anticipating Emefiele’s resumption.

However, he says the new CBN governor is coming into the role in the last month of the second quarter and will quickly need to evaluate the monetary conditions to determine what mix of policy instruments will be required to achieve equilibrium and balance between the domestic and external sectors of the economy.

“He will take comfort in the fact that headline inflation is not too high but will need to see the big difference between anticipated inflation and historical price levels. He will also have to determine if he will prefer to use monetary policy instruments as a strategic tool for economic management or alternatively to react to the illusion of a false sense of economic patriotism,” Rewane adds.

Analysts at BGL Plc, an investment banking group, also believe Emefiele needs to quickly tackle what they call surging inflation in the immediate term.

The company recalls that Emefiele had during his confirmation by the Senate promised to ensure naira stability and to follow a developmental economics approach to monetary policy in support of job creation.

The investment banking group, however, says, “While this might imply the aggressive defence of the naira using the external reserves, we don’t think it completely discounts adjusting the mid-point of the naira exchange rate and the widening of the policy band.

“However, one clear thing is that the CBN, headed by Emefiele, will continue to use all policy instruments at its disposal to ensure a stable naira, not necessarily a strong naira.

It further adds, “In terms of policy approach, it will appear that the most important issue now is how to check the surging inflation, which is further threatened by the likely increase in liquidity due to electioneering.

“Since the electioneering and the potentially high liquidity it brings with it can also have a significant effect on exchange rate volatility, the CBN governor will have to start work on how to curb the effect on these two, which may require that he continues with the tight monetary policy in the short term.”

Analysts at Afrinvest, a research and business advisory firm, say that considering the current level of success achieved with the ‘hawkish stance’ of the immediate CBN governor and the likely political and economic headwinds, Emefiele may choose to sustain the policies to ensure the gains are maintained.

Predicting what may likely happen in coming months in order to maintain the tight monetary stance, Afrinvest, in a response to an email enquiry say, “In view of the 2015 campaign spending, we anticipate further liquidity tightening by an additional increase in the Cash Reserve Ratio on public sector deposit to 100 per cent before the end of 2014, and a subsequent reduction post the 2015 election.

“In addition, the gradual depletion of the reserves (from $49.0bn in May 2013 to $37.3bn as of May 2014), which also constitutes approximately $10.0bn in ‘hot money’ questions the viability of the continued intervention of the CBN at the foreign exchange market.

“In addition, in view of further stimulus tapering in the United States and the expected end to quantitative easing in November 2014, we foresee further capital reversals, hence mounting more pressure on the naira in the mid-term. This presents the CBN with the daunting task of either increasing the MPR (by 50 basis points) to moderate capital flow reversals or permit the devaluation of the naira to prevent further depletion of the reserves. The former may be the preferred so as to prevent inflationary pressure due to the import dependent nature of the economy.”

Beyond these, however, analysts are of the view that Sanusi’s tight monetary stance has not created jobs nor encouraged investment.

Hence, they emphasise the need for Emefiele to lower the benchmark interest rate to enable more access to credit and subsequent productive activities that will lead to employment generation

The Managing Director, Dunn Loren Merrifield Asset Management & Research Company, Mr. Tola Odukoya, says, “We expect the new CBN governor to focus on working with other stakeholders in developing the Nigerian financial system into a market-based system where the securities markets – alongside the banks – work to get the society’s savings to firms in need of financing. This is the next step to the separation of commercial and investment banking activities by the CBN.

“We equally anticipate a review of the interest rate policy with a bias for inclusive economic growth and development following several years of monetary contraction where the growth recorded is not reflecting on the average Nigerian individual or firm due to the high cost of capital.”

The BGL analysts say since the strength of any economy should depend on its small business segment in terms of productivity and job creation, a focus on policies that help job creation will strengthen the economy through increased economic activities and improved tax revenue with huge potential for income diversification for the economy.

Achieving this will, however, require increased access to affordable financing by businesses, either through bank loans, or the capital market

The investment banking group adds, “Since the CBN has achieved more success in curbing excess liquidity through the use of Open Market Operation and other macro-prudential tools like the CRR than interest rate, achieving increased access to financing will necessitate the lowering of the benchmark interest rate in the near term; a wise decision for inclusive growth and economic stability.

“In our opinion, the banks are currently being overly regulated. They need to be allowed to be creative on their own but within a strong risk management framework, which has been put in place in the last five years. As a very conservative banker with guided exposures to high risk investment, Emefiele is expected to want to instil such conservative approach to financial inter-mediation into the banking sector, however, in a subtle manner.”

While encouraging the new CBN helmsman to evolve a more collaborative economic policy between the fiscal and monetary authorities, economists also emphasise the need for same between the CBN and the Presidency.

They note that no matter the political leaning and ideology of the CBN governor, he is expected to work for the common purpose of achieving set objectives by the Federal Government.

However, the BGL analysts say the CBN governor should be a calm, matured and highly intelligent person, who will be able to operate with great independence but in cooperation with the Presidency.

The company, in its economic note on the new CBN governor, notes, “The fiscal and monetary authorities are part of the same government with a common objective. Although the approach to achieving the objectives may differ, they are supposed to complement each other and not contradict. Even when the two appear to be heading in different directions, it should be for a common purpose.”